Ericsson Annual Report 2020 ericsson.com Contents Financial CEO comment 2 Corporate Corporate Governance report 1 report Governance Auditor’s report on the Corporate 27 Business in 2020 4 report Governance report Letter from the Chair of the Board 9 Consolidated financial statements 26 and notes Parent Company financial statements 78 and notes Risk factors 97 Auditor’s report 109 Five-year summaries 113 Alternative performance measures 115 The Ericsson share 120 Remuneration Statement from the Chair of the 1 Sustainability Sustainability approach 2 report Remuneration Committee and Corporate Sustainability management 4 Responsibility Introduction 2 report Stakeholder engagement 6 Remuneration 2020 at a glance 3 Significant topics 2020 7 Total remuneration to the President 5 and CEO and Executive Vice Presidents Responsible business 8 Variable remuneration 6 Environmental sustainability 20 Comparative information on the 11 Digital inclusion 26 change of remuneration and Company Consolidated sustainability notes 28 performance Global Reporting Initiative Index 32 Forward looking statements 36 Ericsson Annual Report 2020 Our legal annual report consists of four parts published as one pdf, which can also be downloaded separately: – The Financial report, including CEO comment, business strategy, the annual accounts and consolidated accounts of the Company – The Corporate Governance report – The Remuneration report – The Sustainability and Corporate Responsibility report, including the GRI index The Company’s annual accounts and consolidated accounts are included on pages 10–108 in the Financial report and are reported on by Deloitte in the auditor’s report. The Corporate Governance report, the Remuneration report and the Sustainability and Corporate Responsibility report have also been subject to assurance procedures by Deloitte. We also file an Annual Report on Form 20-F with the U.S. Securities and Exchange Commission (SEC). All parts of the legal annual report are available on Ericsson’s website. The report Ericsson 2020 in review, published on Ericsson’s website, describes the Company, its strategy and organization. Part of Financial Ericsson Annual Report report 2020 Annual Report 2020 Financial Corporate Remuneration Sustainability report Governance report and Corporate report Responsibility report ericsson.com Contents Financial report 2020 This is Ericsson 1 CEO comment 2 Business strategy 4 Business model 6 Letter from the Chair of the Board 9 Board of Directors’ report 10 Board Assurance 25 Consolidated financial statements 27 Notes to the consolidated 33 financial statements Parent Company financial statements 79 Notes to the Parent Company 84 financial statements Risk factors 97 Auditor’s report 109 Forward-looking statements 112 Five-year summary – Financial information 113 Five-year summary – Non-financial 114 information Alternative performance measures 115 The Ericsson share 120 Shareholder information 124 Financial terminology 125 Glossary 126 Financial report 2020 1 This is Ericsson Ericsson provides high-performing solutions to enable its customers to capture the full value of connectivity. The Company supplies communication infrastructure, services and software to the telecom industry and other sectors. Ericsson has approximately 100,000 employees and serves cus tomers in more than 180 countries. Ericsson is listed on Nasdaq Stockholm and the Ericsson ADS trade on NASDAQ New York. The Company’s headquarters are located in Stockholm, Sweden. It all started in a mechanical workshop in Stockholm in 1876 where Lars Magnus Ericsson designed telephones and his wife Hilda manufactured them by winding copper wire coils. With 5G now a commercial reality, we continue to invest to strengthen our 5G leadership. Our portfolio is designed to help our customers digitalize and to increase efficiency in an intelligent and sustainable way, while finding new revenue streams. The business is divided into four segments with the telecom operators as the main customer group. The segments are Networks, Digital Services, Managed Services and Emerging Business and Other. The market is divided into five geograph- ical market areas: North America, Europe and Latin America, Middle East and Africa, South East Asia, Oceania and India and North East Asia. 2 CEO comment Financial report 2020 Entering a new chapter of growth and profitability Despite a challenging environment in 2020, we completed our turn around, delivered on our financial targets, and established a leadership position in 5G. More importantly, our people continued to deliver and to serve our customers with no disruptions. The pandemic showed the criticality of the digital infrastructure for society. Looking ahead, this infrastructure will increasingly drive global sustainable growth and Ericsson is well positioned to create value from the ongoing digital transformation. Börje Ekholm President and CEO During 2020, we have seen good momentum Company and our focus going forward will for our focused strategy. We were able to be on opportunities close to our portfolio. To complete the turnaround, underscored by ensure that we do not repeat mistakes, we organic topline growth of 5%, a strong gross have established a disciplined end-to-end “We were able to com- margin of 40.3%, operating margin of 12.0% process built on thorough evaluation, careful and solid free cash flow before M&A amount- due diligence, integration planning as well as plete our turnaround, ing to SEK 22.3 billion. This means we have accountability and close follow-up. increase market share successfully exceeded our 2020 targets set three years ago. The global pandemic and accelerate our As we move into the next phase of our The COVID-19 pandemic has put the world expansion into the enter- journey, we do so from a strong position. We under extreme stress. Our focus throughout prise market. We are also continue to transform the Company through has been on the health and safety of our maintained focus on R&D. Over the last employees, customers and other stakeholders. beginning a new chap- few years, we have added more than 5,000 At the start of the pandemic, we transitioned ter of profitable growth engineers and R&D now accounts for 26% of nearly all of our staff to working from home the total workforce. Technology leadership is and by the end of 2020 about 90,000 of showing how critical our critical for providing competitive solutions to our colleagues were working remotely, with technology really is.” our customers, but it is equally important for minimal disruption to our customers. I am our cost competitiveness. inspired by the level of commitment that my In November 2020, we presented a long- colleagues have shown throughout the past term profitability target of 15–18% EBITA year. It has been a difficult one on many levels, margin excluding restructuring charges for but our people – all around the Company – the Group, and a long-term free cash flow have continued to deliver. All of them have my target (before M&A) of 9–12% of sales. These deepest gratitude. targets will be achieved mainly by increasing The COVID-19 pandemic has acceler- market share in our primary segments and ated the pace of digital transformation accelerating growth in the enterprise market. and confirmed that wireless connectivity is We stand firmly by our 2022 targets as an critical infrastructure that underpins society. important stepping stone towards our long- Eventually we will return to more normal term targets. circumstances, but I don’t believe that we We made critical inroads into the enterprise will revert back to the status quo that existed market with the acquisition of Cradlepoint. before. For example, we will most likely see With solutions for wirelessly connecting fixed remote working as part of the new normal. and temporary sites such as field services and IoT devices, Cradlepoint complements our Capturing the 5G opportunity established enterprise offerings and creates 5G is a transformational technology, more new revenue streams for our mobile operator so than previous generations of mobile con- customers. nectivity. With 4G, the world had a global We continue to see that M&A will play an standard that empowered the emergence important role in further strengthening our of platform companies whose value was Financial report 2020 CEO comment 3 multiplied by the underlying network. This focus must be on providing the wider ecosys- to ensure that we keep improving and be eco system allowed consumers to digitalize. tem of developers and enterprises fast access the company we want to be – and that With 5G, enterprises will be able to choose to 5G so they can benefit from its full potential. people expect us to be. We have taken many cellular connectivity as a primary access tech- Our patent portfolio in cellular technology important steps to engage the workforce in nology, likely speeding up their digitalization. is world leading and through our 5G leader- a cross-functional fashion, including making However, I caution against looking for ship we are confident in the strength of the our processes more robust and increasing our the killer 5G app. With 4G, we did not predict portfolio long term. Thanks to our investments headcount in the compliance area. But this in advance the emergence of the many new in R&D, we now have more than 57,000 important work continues, as we need to make business models such as streaming or ride granted patents and over 100 signed licensing sure that compliance is an integral part of how hailing. Countries that built out their 4G agreements. Return on R&D investments, we conduct all our business. infrastructure first, came to dominate the app through licensing based on fair, reasonable, economy. We believe this development will be and non-discriminatory terms and condi- In summary similar for 5G, but for enterprise applications. tions, is critical to ensure new investments in I am proud of our results during 2020. Not only Despite the pandemic, the pace of intro- innovation and the continued success of open, were we able to complete our turnaround, we ducing new 5G functionality increased during collaborative standardization.